Typo in your contract? Court remedies drafting error in environmental indemnity clause, finding that sometimes “do” can mean “do not”

17 May 2021

Mistakes happen - even in contracts executed by commercial enterprises.  Through inadvertence or inattention, an intended word may be omitted, an incorrect word inserted, or remnants from earlier versions may reappear in the final draft.  Often, these errors will go unnoticed.  However, where a key clause contains an error, the consequences could be significant, and disputes may arise about what the parties truly intended the contract to say, or whether the contract actually contains an error at all.  In these circumstances, the Courts can be called upon to resolve the dispute.



What remedies are available when a contract contains typographical errors?  That was the question in in Wei Guang Real Estates Development Ltd. v. Nettwerk Productions Ltd., 2021 BCSC 215 ("Wei Guang"), where the summary trial judge, through contractual interpretation, found that an environmental indemnity clause was missing the key word "not". 

The Court's decision in Wei Guang contains four key takeaways, which may assist parties to agreements of purchase and sale, or contracts more generally, in determining the effect of a drafting error (and are expanded on in more detail below):

  1. Drafting errors in contracts may be addressed using the general principles of contractual interpretation.
  2. When interpreting a clause containing a drafting error, the grammatical structure of the clause can serve as an important indicator of the contractual parties' intentions.
  3. How one contractual party understood a clause containing a drafting error is likely inadmissible in determining the true meaning of the clause, unless that understanding was communicated to their contractual counter-party.
  4. When interpreting a clause containing a drafting error, interpretations which lead to a commercially sensible result should be adopted, and interpretations which lead to commercially absurd results should be rejected.

The facts

Wei Guang Real Estates Development Ltd., a real estate development company, purchased commercial property in downtown Vancouver (the "Lands") from Nettwerk Productions Ltd., for the purpose of redevelopment.  The terms of sale were set out in an agreement of purchase and sale (the "Agreement") with Wei Guang as Purchaser and Nettwerk as Vendor, and included representations, warranties and related indemnities from the Vendor regarding the condition of the Lands. Specifically, in Clause 6(r) of the Agreement, Nettwerk gave the following representation, warranty, and indemnity related to environmental contamination on the Lands:

The Vendor represents and warrants to the Purchaser that:

the Lands have never been used to manufacture, refine, handle, store or dispose of any hazardous substance, except in compliance with all applicable laws, regulations and orders and do contain, nor to the knowledge of the Vendor have they ever contained, any hazardous substance.  The Vendor will indemnify and hold harmless the Purchaser from and against any and all liabilities, losses, claims and damages incurred or suffered by the Purchaser by reason of, or in anyway related to, the breach of this representation and warranty.

[Emphasis added]

After purchasing the Lands, and during redevelopment, Wei Guang discovered contaminated soil.  Wei Guang remediated the contamination, then commenced legal proceedings (the "Action") against Nettwerk for: (i) damages arising from Nettwerk's breach of Clause 6(r) of the Agreement; and (ii) costs of remediation pursuant to the Contaminated Sites Regulation, BC Reg 375/96 enacted under the Environmental Management Act, SBC 2003, c 53.

In the Action, Wei Guang took the position that Clause 6(r) was clearly missing the word "not", and should be read as follows:

the Lands… do [not] contain, nor to the knowledge of the Vendor have they ever contained, any hazardous substance.

Nettwerk disagreed and argued that Clause 6(r) must either be enforced as it was written, or Wei Guang must satisfy the onerous legal test for rectification of the clause.

The summary trial

Wei Guang applied for summary trial, seeking a declaration from the Court regarding the correct interpretation of Clause 6(r).

Wei Guang argued that Clause 6(r) contained a typographical error, that the word "not" was inadvertently omitted and that the proper interpretation of Clause 6(r) is that "the Lands… do [not] contain… any hazardous substance."

At summary trial, Wei Guang only asked the Court to use the principles of contractual interpretation to ascertain the proper meaning of Clause 6(r), although Wei Guang had pleaded the alternative remedy of rectification in the Action. 

Nettwerk argued that the words "do contain" could not be interpreted to mean "do not contain", and that Wei Guang was asking the Court to fundamentally rewrite the Agreement. In Nettwerk's view, contractual interpretation could not resolve drafting errors, and Wei Guang was required to rely on its alternative claim for rectification which required meeting a more onerous legal test.

The decision and key takeaways

The Court agreed with Wei Guang that the typo in Clause 6(r) could be resolved through contractual interpretation, rejecting Nettwerk's position that rectification is the only available remedy where contracts contain drafting errors.  

Following a detailed contractual interpretation analysis, the Court declared that, properly interpreted, Clause 6(r) contains a representation and warranty by Nettwerk that the Lands "do not contain" any hazardous substance.

The Court's decision contains four key takeaways, which are described in further detail below.

1. Drafting errors may be resolved through contractual interpretation

Takeaway: Courts may resolve drafting errors in written instruments using the general principles of contractual interpretation. In other words, a Court may resolve drafting errors by examining the contract as a whole, giving the words used their ordinary and grammatical meaning, and considering the factual context in which the agreement was reached.

In Wei Guang, the Court rejected Nettwerk's argument that drafting errors can only be resolved through the doctrine of rectification. Rectification is a remedy that can be granted by courts to fix errors in a written document. However, rectification is generally only available where a prior agreement between the parties exists, and the written document has failed to accurately record that prior agreement. The Court in Wei Guang found that both contractual interpretation and rectification are tools at the Court's disposal to resolve drafting errors, and that their applicability is not always mutually exclusive.  

The Court referenced a decision of the Ontario Superior Court in Graham v. 10 Tecumseh Ave. West Inc., 2015 ONSC 2704 ("Graham"). In Graham, the Court was asked to interpret a settlement agreement where a key word had been inadvertently omitted. The Court in Graham held that the only reasonable interpretation of the settlement agreement was to read the omitted word as "pay", and that the meaning of the settlement agreement was unambiguous even though it was missing a key word. Notably, there was no discussion of the remedy of rectification, and the issue was resolved solely through the general principles of contractual interpretation.

2. The importance of grammatical structure and coherence

Takeaway: When interpreting a clause containing a drafting error, a court will examine the grammatical structure of the clause to help determine the parties' intentions. A court will try to reach an interpretation which fits coherently within the grammatical structure of the clause.

The Court in Wei Guang relied heavily on the grammatical structure of Cause 6(r) in order to determine what the parties had intended. Particularly, the Court noted the use of the conjunction "nor". The clause states that the Lands "do contain, nor to the knowledge of the Vendor have they ever contained, any hazardous substance." The Court, citing the Oxford English Dictionary, noted that the modern use of the conjunction "nor" is to link two negative statements. The Court found that this suggested that the two statements in Clause 6(r) linked by the conjunction "nor" were both intended to be negative in substance.

This analysis weighed in favour of the plaintiff's position that the clause was meant to state that the Lands "do not contain" hazardous substances.

3. One party's subjective understanding of a contract is likely inadmissible

Takeaway: How one contractual party understood a clause containing a drafting error is likely inadmissible in determining the true meaning of the clause, unless that understanding was communicated to their contractual counter-party.

Typically, evidence of how a party subjectively understood the meaning of a contract is inadmissible and irrelevant for the purpose of interpreting the contract. One exception to this rule is when the party's subjective understanding of the agreement relates to the factual background of the written agreement.

In Wei Guang, a Nettwerk executive deposed that he had read and interpreted Clause 6(r) "as is" when reviewing the Agreement, and did not believe it contained a drafting error.  The Court considered whether these statements could be admitted as evidence speaking to the factual background of the Agreement. The Court concluded that the evidence was inadmissible, on the basis that evidence of the factual background only includes "facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting". Because the Nettwerk executive's subjective understanding of Clause 6(r) was not communicated to Wei Guang, it was not admissible to aid in the interpretation of the clause.

4. Commercially absurd results should be avoided

Takeaway: When interpreting a contract with a drafting error, courts will attempt to reach an interpretation which leads to a commercially sensible result. Courts will assume that a commercially absurd result cannot be what the contractual parties intended.

The Court in Wei Guang found that it made commercial sense for a seller to warrant that the Lands "do not contain" any hazardous substance, as real property which does not contain such substances would have greater value and therefore attract a higher selling price on the market than land that does contain such substances. The Court also noted that reading the clause literally, as it was written, led to the absurd result that the seller promised the purchaser that the Lands "do contain" hazardous substances. The Court found that such a result could not have been intended by rational commercial actors.

Conclusion

In summary, the Court ruled in favour of Wei Guang, finding that the parties mutually agreed and intended that, in Clause 6(r), Nettwerk represented and warranted that the Lands do not contain any hazardous substance.  The Court found that the omission of the word "not" was most likely a typographical error that did not affect the meaning of the Agreement or the intentions of the parties.

Mark Youden and Jeremy Sapers of Gowling WLG (Canada) LLP were counsel for the successful plaintiff, Wei Guang, in this summary trial.  If you or your business require advice about buying or selling industrial or commercial land, contaminated sites or land that is potentially contaminated, we encourage you to reach out to any of the members of our environmental law, construction law or real estate law teams.


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